Trading interest in gold futures rises, open positions at 6-yr high on MCX

High price volatility sparks interest, with futures price ruling higher than spot prices, leading to arbitrage and vibrancy in the options market

High volatility in international gold prices and deep discounts in the physical market, following sharp increase in import duty, have increased trading interest in gold contracts on Multi Commodity Exchange with open interest rising to a six-year high at 30,832 lots (30.832 tonnes). Open interest refers to speculative and hedging positions that have not been squared off.

There was no commodity transaction tax during the first half of 2013, when open interest had previously peaked in January that year. CTT was introduced in July 2013 and huge volumes on MCX and other exchanges had all but dried up. 

Fast forward to the present, and one finds that there is constant increase in open interest with increase in prices and volatility the past two month.

Ajay Kedia, Director, Kedia Commodities says, “Reasons for increase in open positions are high volatility in gold prices, with futures price ruling higher than spot market price, leading to arbitrage and vibrancy in the options market.”

During the past few weeks, prices rose sharply, with a 1-2 per cent intraday difference between the rise and fall. Such a phenomenon has not been seen for the past several years. High volatility is conducive for derivatives market as it offers a good trading opportunity. As a result of higher open positions and increase in trading interest, volumes in gold contracts are also rising. The 2019 average daily volume, at Rs 4,737 crore, is highest since 2016.

Rising volumes both, in gold and several other commodities, have helped sharply increase MCX's revenues and profit in the June quarter, the results for which were declared today. Its total income rose 30 per cent to Rs 110.84 crore and net profit surged nearly five times to Rs 43.70 crore.

Interestingly, the 12.5 per cent import duty has seen gold smuggling increase, due to which the grey market is quoting at a discount to the official price. And with the price being high and domestic demand low, some traders holding gold bought cheap are selling now. This is contributing to discounts in the market of $15-25 per ounce the past few days.

Today discount to the cost of import was $18 per ounce or around Rs 420 per 10 grams, while the cash or grey market was offering a Rs 600 discount to the cost of import. Hence, the MCX August contract was quoting at Rs 300 per 10 gram higher than physical market or Mumbai Zaveri Bazar wholesale price.  

“MCX price being higher, traders are engaging in arbitrage, buying gold in the spot market and selling it on MCX for a profit. This is reflected in high open interest on the sale side or short positions on MCX,” Kedia says.